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AGROCHEMICALS: CHINA BECKONS Slow-growing industry pins hopes on China but faces high hurdles to success Jean-Francis Tremblay C&EN Hong Kong

The world's agrochemical industry is not doing well. Sales are grow­ing slowly, employees are being

laid off, and life sciences companies are considering selling off their agrochemi­cal operations.

Against this backdrop, China beck­ons. It has a large population—more than 1.2 billion people—80% of whom make their living from agriculture. Ara­ble land represents only about 10% of the country's land area, so a need exists to maximize yield per acre. The govern­ment gives a top priority to food produc­tion in each of its five-year plans. Fur­thermore, there is increasing demand for more diversity and better food quali­ty. Best of all, there is no backlash against genetically modified crops in China—public debate on the issue is discouraged.

Nonetheless, China is an extremely difficult and disappointing market for agrochemical producers, whether Chi­nese or foreign. Most agrochemicals and feed additives traded in China are generic. Prices are perhaps the world's lowest. Worst of all, despite an urgent need to raise quality, the proliferation of counterfeit or copied crop protection products means that foreign companies refuse to bring their most advanced products into China.

'The top strategists in the big [inter­national] firms see China as a great, big country," says Michael Chan, Novartis' national marketing manager based in Shanghai. "One simply needs to consid­er the market size, the large population, and the diversity of the main crops, which include wheat, fruit, vegetables, rice, cotton, and others. Moreover, Chi­na wants to develop its agricultural economy, which means that it is impor­tant to find ways to raise the yields. From this point of view, there is a big fu­ture here. But that is a long-term per­spective. There is a great contrast be­

tween what the future could be and the reality in the short term."

Next year, China aims to produce 490 million metric tons of grain, includ­ing rice, wheat, corn, and other cereals, says Kosuke Tsuda, managing director of Sumitomo Chemical's Shanghai sub­sidiary. A lower target set for last year was achieved, he says. But because of an expected increase in the size of the population, food production targets have been set higher for the next five-year plan, running from 2001 to 2005.

Surprisingly, the market for agro-chemicals in China has been stagnant for the past several years, according to Guil­ford S. Ide, who is serving this year as the chairman of the Crop Protection Associa­tion of China, a group of 16 international manufacturers marketing products there. Ide is also business manager of DuPont's agricultural products in China.

'The market in China is about $1 bil­lion for agrochemicals, and it's been flat for the past couple of years," Ide says. "A lot of that is related to the capacity for local synthesis, and formulation is about two times demand. Although there are 1,300 [Chinese-owned production] facil­ities, many of them are running at very low levels. As they all struggle and

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compete in the market with too much product, the product price just keeps decreasing."

Estimates of the size of the Chinese market for agrochemicals vary. Sumito­mo's Tsuda says it was worth between $700 million and $1.6 billion in 1997, de­pending on whose market research re­port one consults. Novartis' Chan says his firm uses fairly sophisticated estima­tion methods to determine that Chinese agrochemical producers sell about $1 bil­lion worth of products annually, whereas foreign firms sell $300 million worth of products in China, either imported or produced locally, for a total of $1.3 billion.

Tsuda adds that what matters really is the trend. Although the market has not been growing recently, potential and vast opportunities arise from the ra­tionalization of China's domestic agro­chemical industry, the phase-out of haz­ardous pesticides, and market require­ments for more abundant, diverse, and better food. Tsuda cites one study that forecasts that by 2002, China's market for agrochemicals will grow in value by 5.8% per year, which is double the world average.

One oddity in China is the large num­ber of producers. The Chinese Crop Pro­tection Industry Association has 250 members—a fraction of the total number of producers. These companies control between 70 and 80% of China's agrochemi­cal market, leaving the rest to foreign firms. Tsuda says the Chinese govern­ment is reviewing the profitability of its agrochemical producers to determine which should continue operating.

In the U.S., Chan notes, the top 10 agrochemical producers control 90% of the market. One reason for the domi­nance of Chinese-made products is that foreign products are more expensive.

Chinese companies manufacture a large quantity of products with undesir­able characteristics, Chan says. He ex­plains that this year, the market is made up of about 60% insecticides, 22% herbi­cides, and the rest fungicides. The vast majority of insecticides are organophos-phates, about half of which are highly toxic. The "high-risk" compound meth-amidophos is the most widely sold in­secticide in China, he says.

Sumitomo's Tsuda says that China is eager to remove the highly toxic and widely used compound parathion from the market, but a high-technology, more benign alternative is too costly. He adds that China is one of the few countries still producing and exporting DDT. Because

3 8 OCTOBER 18,1999 C&EN

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some of the insecticides produced in China are so dangerous that they are about to be banned by the United Na­tions Environment Program and the U.N. Food & Agriculture Organization, additional opportunities exist for for­eign companies to introduce safer alter­natives, he says.

Foreign producers have made £ impressive efforts both to establish f their brands in the Chinese market ^ and to build production facilities in §• China In some cases, the compa- S. nies seem to have taken a redly | long-term perspective. "If we look £ at the performance of foreign agro- | chemical operations in China," €. Chan says, "the chief executive of­ficers cannot be smiling."

Firms are making big bets. In Jiangsu, Zeneca is building an $85 million facility to make the herbicide paraquat. The facility will export to the rest of Asia. Citing ros­ier estimates than other companies, Zeneca estimates that the Chinese her­bicide market is worth $450 million and that it is growing at 20% annually. The

company explains that being in China will allow it to develop a more cost-effec­tive distribution network. Other foreign companies with plants in China are No-vartis, DuPont, Rhone-Poulenc, AgrEvo, Rohm and Haas, and FMC.

Ide (left) and Chan

In terms of training Chinese farmers in the safe use of pesticides, Ide ac­knowledges that foreign firms are spending more than profits warrant. "We all try to make big up-front invest­

ments in things like safe use, because a really great product can disappear be­cause it was misused—[perhaps] a crop was damaged, or the result was not as expected, or in the worst case, some­

body was harmed." The government, Ide says, of­

fers no financial support for the firms' training activities. But that is a minor irritant compared with counterfeiting and trademark in­fringement. The problem seems to be more serious for foreign companies than local ones be­cause foreign companies gener­ally invest more in R&D and brand development.

In the 1970s and '80s, Sumito­mo developed and introduced into the Chinese market its pyre-throid insecticides Sumicidin and Sumi-alpha, which are based on the active ingredients fenvalerate

and esfenvalerate, respectively, Tsuda says. Sumi-alpha, sold under the Chinese name Lai Fu Ling, is a household name in China because of a widespread television campaign, Tsuda adds.

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Sumitomo's brand names and pack­aging are now widely copied all over China, Tsuda says, and he documents the claim by filling several office folders with an incredible number of counter­feit labels.

Products are counterfeited in various ways, Ide explains: 'The first category of fakes is where the company gets the packaging identical and fills it with clay. So, there is no active ingredient inside. The second type is where they match the package identically, and then put some agrochemical in there. Maybe it is close to what we would sell, but typical­ly it never matches." Ide explains that penalties for counterfeiters in China are proportional to the degree of faking.

Novartis' Chan says that mechanisms to prevent a company's product from be­ing copied do exist. He says that before 1993, it was possible for a foreign compa­ny to request "administrative protection." Once the administrative protection mech­anism was activated, Chan notes, it was il­legal for Chinese companies to copy the product that the foreign company manu­factured locally. Without administrative protection, Chinese firms could legally copy products made by foreign firms, but they couldn't use the same trademark.

Ide says that DuPont's Londex bene­fits from administrative protection, but two Chinese plants that were producing Londex' active ingredient prior to 1992 were allowed to legally continue. Ad­ministrative protection simply made it il­legal for other plants to begin producing Londex.

In 1993, China implemented a more stringent patent protection law. Ide comments: "We should distinguish that, in terms of IPR [intellectual property rights] protection for agrochemicals, we would say that the legal structure is okay. It's the enforcement that doesn't work—or, at least, it works very poorly."

Two years ago, foreign agrochemical producers formed the Crop Protection Association of China (CPAC) in Hong Kong. The organization, which now has an office in Beijing, has 16 members— AgrEvo, American Cyanamid, Zeneca, BASF, Bayer, Dow AgroSciences, Du-Pont, Elf Atochem, FMC, Monsanto, Nis­san Chemicals, Novartis, Rhone-Poulenc, Rohm and Haas, Sumitomo Chemical, and Uniroyal. Ide insists that local compa­nies are welcome into the association.

At present, the issue of IPR is given top priority by CPAC because it is the prime obstacle to the introduction of more advanced crop protection prod-

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By and large, transgenic crops have not been introduced in China. Monsan­to is conducting some experiments with transgenic cotton in Hebei Province near Beijing. But this remains limited.

What prevents the wholesale introduc­tion of engineered seeds into China is an IPR issue rather than government or consumer concerns. "Related to trans­genic crops, there is the seed law," Ide explains. "Seed law in China does not permit majority share by a foreign enti­ty. . . . That is a practical limitation to bringing transgenic crops in or bringing the research element in." Without ma­jority ownership, foreign companies have no assurance of maintaining con­trol of their technologies.

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Tsuda displays part of his collection of counterfeit labels.

CPAC is also concerned by what it perceives as unequal treatment of foreign companies. 'The government requires more data, more studies, and more time for us to register a product as opposed to a local company," Ide says.

For Beijing, food production is a very important priority, but protecting China's agrochemical producers is also a con­cern. Many of the policy measures that hinder the progress of foreign agrochem­ical producers in the Chinese market are aimed at shielding Chinese makers of crop protection products from foreign competitors. Additionally, limiting im­ports is one of China's considerations.

"In 1999, the [import] quota system changed from being administered by the National Planning Commission to being administered by the State Eco­nomic & Trade Commission," Ide notes. "When that transition occurred, it creat­ed a big difference in terms of the imple­mentation of the quota system. This year a quota has been very difficult to find. It's a system that seeks some level of balance for the local companies ver­sus the foreign entities, [although] I suspect you are probably looking at Chi­na being concerned about managing the outflow of funds." He estimates the total quota to be worth $200 million.

Conditions in China are not perfect, and the stakes are high, Chan com­ments. "If China were a small country, we wouldn't care about these little prob­lems. But it's a big country."

Philosophically, he adds: "In 20 years, China has changed dramatically. If we re­main confident that it will continue to im­prove in the future, we will stay. But if we see a negative tendency, we will be less interested. Compared with the U.S., com­petition in China now is barbaric. But compared with China 20 years ago, it's an enormous improvement."^

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